The Stock Market Rises: Trust the Bounce?

By Ben Levisohn

The bulls have responded to yesterday’s selloff, as 3M (MMM), GoldmanSachs (GS), E. I. du Pont de Nemours (DD), Yum! Brands (YUM) and Gannett (GCI) lift the major indexes higher. Are the bears waiting to pounce?

Associated Press

The Dow Jones Industrial Average has risen 0.3% to 15,424.89 at 10:14 a.m., lifted by the likes of 3M, which has gained 1.5% to $125.70, Goldman Sachs, which has risen 1.5% to $162.21, and E. I. du Pont de Nemours, which has advanced 2% to $61.20. The S&P 500 has gained 0.5% to 1,750.90, as Yum! Brands rises 9% to $72.08 on better-than-forecast earnings and Gannett gains 3.8% to $27.52 after reporting its results.

Yesterday’s selloff was driven by a weak ISM reading that called into question the strength of the U.S. economic recovery. Today, the market has put those fears behind it–but maybe they shouldn’t. Societe Generale’s Paul Jackson explains why:

How rare is such a dive in the ISM? Since its inception in January 1948, there have only been 26 months when the headline index has fallen by 5 points or more, which is roughly 3% of the time. What happens next? If like me you would expect a rebound after such a plunge, you may be disappointed – a positive move only occurred 10 times (out of 26) in the month immediately following the dive (ie 38% of the time) and a significant rebound (of 3 points or more) occurred only 3 times (12% of the time). The three dives with rebounds of 3 points or more occurred in either July or October, so were unlikely to have been weather related. I still think the weather had some effect but the history of the ISM offers little comfort…

…recent history suggests that peaks in the ISM are associated with peaks in the S&P 500 (with varying leads/lags). In any case the ISM was approaching peak levels which suggested limited further upside potential in US equities (valuation metrics such as the Shiller PE tell a similar story). My suspicion is that the “out of left-field” nature of this reading suggests a rebound will occur but my conviction is lessened by all of the above.

The Lindsey Group’s Peter Boockvar blames the Federal Reserve for the markets weakness:

…we’re potentially seeing the same stock price tv show that was played after QE1 and QE2 ended, which now in turn is begging the question from some of whether the Fed should end the taper and thus put us back on this endless and unwinnable vicious cycle of QE. At the cost of further downside in equity prices, potentially much more so (I reaffirm my beginning of the year 1550-1600 price target range as the 2013 QE fluff comes out of the market) and whatever broader problems this will bring, I hope the Fed keeps on cutting QE as Atlas of the stock market they should not be and an economy dependent on savings and investment I hope will eventually win out. I’ll say again, there will never be a good time to end QE/ZIRP and we will not be able to avoid the short term pain of it but it must take place for the sake of the long term health of the US and global economy.

Strategas Research Partners’ Daniel Clifton and Jeff Rubin find a silver lining amid the clouds of the recent market weakness. They write:

In every midterm election year since 1962, the S&P 500 has experienced a large intra-year decline with the average decline being 18 percent. But from that intra year low, the S&P has increased in the following 12 months every time with an average gain of 32 percent. Moreover, the S&P 500 has not declined in the 12 months following a midterm election year since before 1950 as equities rally through the election into the third year of the presidential cycle. While the current sell off is more complicated than just election uncertainty, the strong trend is something to keep in mind in the coming weeks and months ahead.

On paper all is well showing strong stocks, reduced costs, better profits, and stock steady. Reality is this activity is False. It works! The accounting numbers look good. But False.

The cash was not gotten by businesses from the capitalist market, the hiring was not done for real demand economic expansion, the stocks did not rise on business supply to economic demand, and hence GDP is False.

Hence, economic expansion beyond equilibrium (between basic needs and supply) did not occur. There is no Growth.

Counting dollars at 2 percent +/- dollar inflation show more dollars used but not from voluntary demand dollars but customers forced buying at higher prices showing increase in sales dollars not actual increase in sales based economic demand expansion growth. Yes, a False economy.

During the Great Depression, there were those who worked through it all, others part-time, others cyclically hired and laid off, and others who, as today, cannot and will never again work.

Yes, the U.S. Federal government is at Fault. Providing cheap loans to the poor who received for generations U.S. Federal Government Welfare, wrote laws telling Fed to let loose money for low interest rates for those on Generational Welfare to move into a house, however, what was good for one-class is egalitarian good for all. Itinerant unstable income job holders in the economy were also approved hence housing bubble.

All mortgages were bundled with other investments. The Generational Welfare could always pay, the itinerant workers less able. Fail then Uproar among the investors! Next the U.S. Federal Government via Treasury, via the Federal Reserve made / is making whole those defaulted securities paying a few trillion extra.

Taxes were not raised but Fees in lieu of Taxes were. Muddle through (memes).

Businesses now having zero percent loans awash do not borrow for economic demand expansion (because there is none) but can borrow for margin stock purchases (buy low sell high margins) and could possibly pay back. No cash for long term U.S. Economic Expansion based on Economic Demand.

During the time U.S. Media (investor class) cooperated with the U.S. Federal Government broadcasting to all U.S. Citizens via newspapers, magazines, radio, television, and the internet loud various Propaganda supporting the No-Spook The Populace Policy using a variety of Propaganda Techniques. All is well. Including today.

Next, the U.S. Federal Government Nationalized the U.S. Medical Industry forcing all U.S. Citizens to send money to the U.S. Federal Government.

Economic Reality: U.S. Economy is completely distorted (disrupted for those chiche’). 100 percent of all U.S. Business are Directly or Indirectly Dependent on U.S. Federal Government for income profitability. All Six Stock Market Ratios Indicate False Stock Prices.

Truly, Baby Boomers are completing their lifetime purchases en masse. Demographically, GenX are missing 11 million consumers needed for the economy as compared to Baby Boomers, and Baby Boomer Children (77 millions or so) won’t come on-line until 2020 the very earliest to make a Real Economic Recovery Reality.

2014 Business Revenue Disclosures show Profits based on Economic Demand Flukes, U.S. Federal Government Direct contracts, modified Accounting Techniques, and lessened Government Taxes, Reduced Work Force, Reduced Wages, and Supported Stocks via Buybacks. Including all aforementioned, many companies are able to show health.

About Stocks To Watch

Earnings reports, corporate strategies and analyst insights are all part of what moves stocks, and they’re all covered by the Stocks to Watch blog. We also look at macro issues, investor sentiments and hidden trends that are affecting the market. Stocks to Watch gives you the full picture of the U.S. stock markets, all day long.

The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.